A deep dive into the GCC’s cloud kitchen sector [part two]
Cloud kitchens are the backend equivalent of the food courts found in malls - several offerings all under one roof. They emerged as a response to the growth of online food delivery, enabling restaurants to reach a wider audience without the need to build physical locations.
As previously outlined in the first part of this deep dive, several cloud kitchen business and operating models have emerged. Within this, it is the virtual brands that are the fastest growing segment. This model, which shuns the high cost of renting and fitting out a kitchen, creates the brands and then outsources the rest of the value chain to others. They make for an attractive proposition for venture capitalists (VC) who have become more comfortable with asset-free investments, particularly those that do not need to commit to long rental leases.
In Dubai, The Leap Nation and Cloud Restaurants currently dominate this space, while other players are slowly beginning to emerge.
According to RedSeer Consulting, satellite or cloud kitchens account for 60-70 per cent of the market while virtual restaurants and brands account for 20-30 per cent.
“Generally, what we have seen in most countries is that satellite kitchens are the first wave, they take most of the market. The next wave is the virtual restaurant and brands, they correlate with the satellite kitchens,” says Sandeep Ganediwalla, managing partner at RedSeer Consulting.
The Second Wave
The Leap Nation, which has 13 brands ranging from fried chicken to freekeh bowls has partnered up with Kitopi to cook its dishes which are listed on the delivery aggregator platforms. The benefit of outsourcing every step besides the menu and brand creation, allows the company to pivot quickly and respond rapidly to customer demand. If a particular item or menu does not sell well, it can be killed off immediately, without incurring major losses.
Cloud Restaurants, also based in the UAE and founded by Ziad Kamel, the founder of Couqley French Bistro in Beirut and Dubai was approached by Deliveroo to onboard his restaurant on Deliveroo Editions in a bid to offer users of the platform a fine-dining concept.
“We had a unit [in Deliveroo’s kitchens], fully-equipped with our staff and we had a brand working out of there on a virtual basis. Why not use the same infrastructure to launch a purely virtual brand? That’s where the idea came from in 2017,” says Kamel.
And so, with his business partner Rowan Kamel, the pair founded Cloud Restaurants, focusing on brand and menu creation. Its first virtual brand Go! Greek averaged 800 orders per month when it initially launched and now with seven brands, Cloud Restaurants has more than 12,000 orders a month.
Algorithms Versus Creativity
The success of these concepts is largely down to branding and creating customer loyalty through social media platforms, which requires a large marketing budget.
“A lot of people are creating virtual restaurants in a matter of weeks, but they have forgotten what makes a restaurant successful and that’s creating an identity, a theme,” says Mubarak Nabil Jaffar, founder of Kuwait London Company (KLC), which operates its own cloud kitchens and brands in Kuwait and has partnered up with Kitopi to offer those brands to customers in Dubai. “We developed everything from the logo, packaging, uniforms, we created an identity for the brand.”
But it goes beyond just the logo and packaging, these operations rely more on adwords, discounts and visibility on food ordering platforms. Even if orders come in, repeat custom is not guaranteed if the quality and standard does not match the customer’s expectations.
“If you launch a virtual brand and you get 100 orders, you think that’s great, why would I improve the quality? It may not be due to the fact that people genuinely like your food,” says Jaffar, who argues that orders could be coming through because of the discount offered or out of curiosity.
“Virtual restaurants haven’t proved that this model or industry is sustainable in the long term, there’s no real brand loyalty, so many brands open and close,” he says.
The barrage of new brands also creates a lot of noise and they crowd the aggregator platforms, creating an ever-expanding funnel for marketing spend.
“These online aggregators started as online menu and delivery service, but they have morphed to become a marketing platform, they charge restaurants to be more visible on their app. You gain visibility if performance and delivery time is good, but lose that visibility if you don’t take part in their marketing,” says Paul Frangie, founder and head chef at Dubai-based restaurant Hapi.
The roster of different brands are also created by a small team of chefs who focus more on consumer ordering patterns and create menus tailored specifically to certain areas or zones of a city. It is data that drives their decision-making and menu creation, rather than creativity and authenticity. Customers might unknowingly be eating the same dish, developed and cooked by the same person, just packaged differently.
“I think a lot of business people moved into this sector, they see an opportunity to make money, but it is not necessarily creative. They don’t understand the food industry enough to want to differentiate themselves,” says Frangie. “What we have seen in the last year and a half is companies coming up and throwing 10 to 15 concepts and they see what sticks. If they are doing deals to launch brands, customers benefit because they get a cheap meal, but they might not see that concept on the platform a few months later.”
For a “kitchen as a service” operator like iKcon, the high marketing cost is one reason why they prefer to work with established restaurants rather than working with virtual brands.
“It’s not easy to get a brand out there, it needs a lot of investment, it needs marketing experts and knowledge, we’d rather work with well-established brands,” says Khalid Baareh, co-founder and chief executive officer at iKcon.
And according to Khalid there are now plenty of restaurants that are considering cloud kitchens in the aftermath of the coronavirus lockdown. When the pandemic swept through the region and governments enacted strict lockdown measures, restaurants suffered terribly and those that relied mostly on dine-in customers had to shift their business model to a delivery-only model overnight.
What was once considered an incremental source of revenue became the only lifeline.
“There is no doubt that the delivery part of most restaurant concepts is here to stay and will accelerate,” says Hashem Montasser, co-founder of The Lighthouse restaurant in Dubai.
Although the online food delivery market dropped by about 40 per cent during the three months of lockdown, the sector has bounced back. According to Statista the online food delivery sector is set to grow to $4 billion by the end of this year (accounting for Covid-19) in Mena, up from $3 billion in 2019.
But the growth of online food delivery is still not enough to make up for the losses incurred over the lockdown period and reduced dine-in capacity. Moreover, the reassurances of hygiene standards and hand sanitisers on tables have not lured customers back to pre-Covid dine-in levels in areas where capacity has not been limited.
“Brick and mortar is suffering and will continue to suffer,” says Baareh. “You don’t have the volume or footfall and instead of shutting down, you can go to a cloud kitchen and keep your brand and brand awareness.”
One of the main reasons why brick and mortar restaurants are suffering at the moment, particularly in the UAE, is the high rate of rent. Some landlords have renegotiated their terms with tenants, others have been less willing to do so and many restauranteurs are now considering alternatives or risk shutting down.
“The economics of F&B [food and beverage] businesses have always been difficult and are now particularly challenged. Landlords need to understand that it’s a partnership, but here, there’s a disconnect and they just want those cheques,” says Montasser.
Food delivery subscription platform Munch:On expects 30 per cent of all restaurants in the UAE to shut down by the end of 2020. As restauranteurs tussle with landlords for more favourable rent terms, cloud kitchen operators have stepped forward, believing they offer restaurants a lifeline to survive. The chefs can take their menu and recipes and switch to a delivery-only option using a cloud kitchen and save on paying substantial amounts in rent.
“When Covid-19 hit, and we couldn’t do any dine-in at all, we struggled. I had tried to renegotiate the rent with the landlord but that wasn’t successful, so I started to look at other options,” says Frangie, who ended up signing onto Krush Brands’ platform to widen his delivery reach.
If the food aggregators created the use case for cloud kitchens, then Covid-19 cemented their necessity for the growth of food delivery.
“We will probably see some of the bigger traditional restaurant groups move into cloud kitchens because if you want to play in food, you will have to do delivery first then dine-in second. It became the opposite way round,” says Mohammad Al Zaben, co-founder of Munch:On. “For the [smaller] shops, it might be very hard for them to mobilise something like this, but we will probably see a few courageous entrepreneurs starting a restaurant from a boutique cloud kitchen from scratch and plug into aggregators.”
Essentially, the aim of most cloud kitchen operators is to maximise the utilisation of its space and facilities. For Olaf Abi Aad, founder of The Cloud, this needn’t take place in a separate cloud kitchen facility.
“The first generation, the shared space, it needs investment in a massive kitchen space that you subdivide, and chefs can come and rent a corner. I don’t see this going too far, it’s like a big vessel that you need to keep filling up and it keeps leaking,” he says.
Those that rent the space either succeed and leave to establish their own kitchen, or they fail and still end up leaving he says.
“For the asset-based kitchens [KaaS model], it is very asset intensive, you need to keep investing in kitchens and operations and need to keep up the quality, you need to expand geographically which means you need to expand in investment,” says Aad.
His solution is to create virtual brands within the restaurant’s own kitchen, in line with their own menus, rather than encouraging chefs to lease out a space in a cloud kitchen.
“If you have a burger joint and you’re able to organically reach Dh5,000 worth of orders a day, to reach Dh6000 you need to spend extra on marketing. I come in and look at your assets and capacity and I can see you can cook double what you do today. I establish a brand based on your own knowledge, but the brand is mine and I drive the sales and I increase the asset utilisation at your end,” says Aad.
It is a model that reflects the diffusion line often launched by fashion houses to appeal to different segments of the market.
“If you have the existing infrastructure, it does make sense to try to do that,” says Montasser. “Experimenting from your own kitchens is a good thing, kitchens are very rarely busy all day, you can pick up on the slack and convert it into a separate brand or you create certain products that are only available on a digital menu and cook them for deliveries.”
Having the option to maximise utilisation of kitchen space and develop virtual brands is how “traditional restaurants will be able to work with this new world”, according to Montasser.
For Aad though, his business goes beyond kitchen utilisation and moves into the franchising space. The Cloud plans to map all the kitchens in the region and understand the types of cuisines they cater to, their size, capacity and quality.
“Suddenly you have a map of 5000 different kitchens, so if you have a Thai food brand and they were thinking of franchising, currently they only have a couple of options either a joint venture or find a partner to franchise with. This is a very tedious and lengthy job with a lot of legal costs,” he says.
The Cloud’s solution is to offer the brand its platform which identifies the kitchens that are able and willing to onboard the restaurant’s menu.
“It is a very minor step before your brand is up and running the Middle East. This is the thing that will disrupt the franchising industry,” says Aad.
As is the case with the virtual restaurants and brands, the sustainability of the business model has yet to be proven. All the cloud kitchen operators we spoke to claim they are currently running at a profit or close to making a profit. What remains to be seen is how the wider F&B sector will develop in light of Covid, how consumer expectations will evolve and the impact that will have on the cloud kitchen space. Because while these new brands keep emerging, the fast-food chains, namely McDonald's, KFC and Pizza Hut still dominate the online food delivery orders in the Middle East, benefitting from their long experience in delivery, affordable price point and strong brand awareness.